Recent Science Hoaxes Reruns of 2001 California Energy Crisis

Wayne Lusvardi

Has anyone called for a separation of media from government?

Going into the winter of 2001, you could not imagine the political and financial predicament that California was in if you had to depend on mass media about the California Energy Crisis.  I formed a task force for the largest urban water district in California at that time and came to understand the crisis from firsthand information.

In 2002 Enron was accused of spiking electricity prices in California by taking power plants offline at the peak of the crisis.  But my research found it did so, not to create a shortfall to game the market (as depicted in the book The Smartest Guys in the Room and movie 2005) but to avoid conveying power when the grid was congested, which lowered prices.

The Cal Energy Crisis was really a financing crisis, as California was not running out of electricity but clean air in 2001.  Moreover, the management of the crisis became a template for current public health and environmental science hoaxes. 

In 1996, Clinton federal EPA had ordered California to reduce air pollution in its smog traps by 2001 or it would cut off federal funds. The fastest way to do this was to mothball nineteen polluting coal and diesel-fueled power plants owned by three regulated private utilities: San Diego Gas & Electric (SDG&E), So. Cal. Edison (SCE) and Pacific Gas and Electric (SDG&E). These “dirty” power plants were replaced with less-polluting natural gas power plants built and operated by merchant energy producers not utilities. Moreover, this decentralization by so-called deregulation undercut the Rate Base and economy of larger scale of regulated utilities resulting in higher prices.

However, California experienced blackouts during a freak 2001 winter cold snap, suffered retail electric price spikes, and then, the crisis disappeared when a $42.6 billion water bond was issued to finance the costs of cleaning the air. Wholesale power costs for 1999 were $7.4 billion but $27 billion per year for 2000 and 2001.

The official cause of the blackouts was that deregulation was botched due to the California Public Utilities Commission (CPUC) not authorizing enough new natural gas power plants to be built to replace the old “dirty” plants.  However, the CPUC also did “not permit utilities to hedge their bets with long-term, bilateral contracts” (Congressional Record, Vol. 147, Part 5, 2001) that would have prevented the price spikes.

This understanding of this crisis was influenced by the movie media that it was a “perfect storm” of a coincidental number of events:

A freak winter California cold snap,

More than usual power plants were idled for maintenance,

A drought of backup hydropower in the Pacific Northwest,

A long-standing bottleneck of the Path-15 transmission line impeded sending power north or south,

Cal-Trans shut down a natural gas pipeline from Texas to undertake freeway repairs,

Electric ratepayers were mostly kept in the dark that $42.6 billion of unpaid mortgages (bonds) on the old power plants were stranded costs without any revenue to pay them off after the old power plants were mothballed.  

California was in a “political pickle”:

• Asking the bond holders to take a loss would have crashed the bond market.
• The stock-owned electric utilities could not absorb the tab as they were already going bankrupt.
• Asking state government to raise taxes to cover the $43 billion debt would have provoked another Howard Jarvis Proposition 13 tax limitation revolt.  
• Putting it on the ballot with full disclosure as to the real cost to reduce air pollution would have likely resulted in the measure being shot down by California’s environmentalist free-rider voters.

The environmentally conscious public believes that public goods, like clean air, should be socialized to the extent that its cost would effectively be free.  The “free-rider” issue is the main problem of public goods economics.  Everybody wants clean air and clean water, but no one wants to pay the astronomical cost for them.   

The first government attempted financing solution was to create a market price bubble that would pay off the debts by not building enough new power plants. That failed because the state legislature was taken over by the Democrat Party which enacted retail price controls ($0.51 per kilowatt hour versus average $0.12 per kWh in 2001).  This resulted in skyrocketing wholesale price increases ($377 per megawatt hour; $0.37 per kilowatt hour) that the regulated electrical utilities could not absorb and PG&E was forced into bankruptcy (but oddly SDG&E had previously recovered its stranded costs before the crisis by including it in its electricity rates). 

This story of how a clean air mandate morphed into a so-called energy crisis, a contrived electricity price bubble, price controls, utility bankruptcy, blackouts, merchant power producers overcharging then having to rebate the overcharges, a potential bond market crisis, a fake California “wet drought”, inflated long-term electricity rates, the recall of a state governor, and, effectively, taxation without representation, was so complex that the scapegoated Enron greed story was more believable to the public. Journalists blamed Enron and academics blamed “deregulation” but both were diversions.

At the start of the crisis, third party trading speculators were allowed into the electricity market to jack up prices to help create a price bubble but were cut off when price caps were enacted.  Arbitraging was structured into the market rather than Enron illegally gaming the system. Blackouts came after price controls were enacted. In 2001, the Federal Energy Regulatory Commission (FERC) ruled that market manipulation (by Enron) did not cause the crisis. Much later in 2015, a federal judge dismissed a class action lawsuit alleging that JP Morgan was involved in racketeering and manipulation of the 2001 California energy market. 

The municipal Los Angeles DWP and Pasadena W&P reaped much greater windfall profits selling backup hydropower than Enron, but they did not have to refund the overcharges as did merchant energy companies. 

Eventually, the $42.6 billion in stranded power plant debts and refunding of overcharged power purchases were rolled into a mega-water bond by the California Department of Water Resources to be paid off by energy purchases to pump water to Southern California. Later, a cover story for this shift of stranded power plant costs onto water ratepayers was attributed to a “regulatory drought”. In 2001 California was not running out of electricity. They were running out of clean air and a way to finance its air pollution cleanup cost.

The Foundation for Economic Education got the story right, but for the wrong reasons, when they wrote “California’s Power Problems Are Self-Inflicted”.  ConsumerWatchdog.org claimed the “Energy Crisis Was a $71 Billion Hoax”, but wrongly blamed Duke and Reliant companies, who had to repay the electric utilities for the overcharging anyway.  The refunds did not require voter or CPUC approval because it was an “emergency”. 

In 2001 Hollywood uncannily issued the movie “The Perfect Storm” (2000) about a ship lost at sea that is explained with a metaphor about a freak combination of natural events. This movie was ostensibly to influence public opinion that the California electricity crisis was an unavoidable set of coincidences. The Perfect Storm movie cost $120 million, took three years to finish and was produced by Paula Weinstein. 

Another movie purporting to be a documentary – The Smartest Guys in the Room – scapegoated Enron as the culprit behind the California Energy Crisis.

By 2020 to 2023, the bugaboo virus pandemic, train wreck chemical spills and fire disasters and fake global warming catastrophes have all been preceded by similar self-fulfilling propaganda movies in what is called “predictive programming”. 

Wayne Lusvardi worked for the largest urban water district in California for 20 years, is a public utility valuation expert, water and energy policy analyst and resides in Arizona.